KEY POINTS:
Few people know the town of Otautau in Southland but news last week its main employer is to close brought home the harsh realities of New Zealand's floating exchange rate.
Bright Wood, an American-owned timber mill, largely blamed the high kiwi dollar for its impending closure. The loss
of 99 jobs in a town of 753 is like a chainsaw hacking into the town's heart.
Bright Wood president Kevin Stovall blamed the strong kiwi dollar, saying "aggressive" tactics by the Reserve Bank to curb consumer spending were hurting the export sector. "The Reserve Bank's inflation-fighting strategies will continue to put significant pressure on the New Zealand dollar to continue to strengthen relative to the US dollar," Stovall said.
The mill made housing materials for the American market.
Stovall said the rising cost of doing business, particularly electricity prices and Government measures such as an extra week's annual holiday for workers had contributed.
The Wood Processors Association said three major mills were on the brink of closure mainly because the exchange rate made them uneconomic.
"We have been profoundly hit by the very high New Zealand dollar for a very long period," association chairman Dave Anderson said.
Other exporters are no doubt experiencing similar pain. Publicly listed fishing company Sanford told shareholders the exchange rate had made life "exceedingly difficult".
Sanford, which exports the bulk of its catch, has done just about everything right in trying to manage the exchange rate. When the kiwi dollar fell under US50c five years ago it took out forward cover for three years.
Having taken the advice of just about every economist in the country, Sanford expected the exchange rate to fall last year. It did for a while - to US60c in June, but rose again as the Reserve Bank reneged on a mid-year signal to cut interest rates as it grappled with inflation of 4 per cent.
Sanford chief executive Eric Barratt pointed out that consensus forecasts had never been so wayward. Every analyst logically reckoned that with a current account deficit running at $14 billion - a mind-boggling 10 per cent of GDP - and economic growth at a paltry 1.5 per cent, the kiwi was heading for a fall.
No such luck. Those interest rates - the highest in the developed world - meant every foreign investor wanted a piece of the kiwi.
Barratt mistakenly took the experts' advice, held Sanford's US dollar export earnings in the hope of a currency fall, and consequently took a $4m forex hit in the first quarter.
Sanford chairman Bruce Cole launched into the Reserve Bank. "I find it questionable that the Reserve Bank's policies ... treat inflation as almost the only economic evil."
He pointed out that so-called investors in New Zealand - speculators - added costs rather than value.
"They do not lead to the creation of new and productive assets and community welfare, economic security and wealth, but instead contribute ultimately to balance of payments deficit woes."
The wood processors' Anderson said the key initiative his industry needed to have addressed was a more stable currency.
"This over-valued situation is just unsustainable for ourselves and for many sectors in the New Zealand economy that are exporting. This is not just a forestry problem."
The Reserve Bank refused to comment, referring inquiries to its December Monetary Policy Statement.
What we find is the bank assumes interest rates will rise in the first half of this year and stay that way until the second half of 2008. Higher interest rates usually mean a higher currency.
Governor Alan Bollard revealed just how isolated he is when he said then: "We are not hearing a series of serial stress problems in the export sector."
Even though New Zealand had negative inflation in the December quarter, and is likely to get another very low quarter this period thanks to falling petrol prices, Bollard signalled last month he is likely to put interest rates up again in March.
The economic data coming in mostly confirms just how weak the economy is - figures last week showed building consents fell for the third consecutive month with a 5 per cent slump in December.
But the data that will sway Bollard was the housing investor confidence survey showing New Zealanders' confidence in house price appreciation has jumped to its highest point since the peak of the housing boom in 2003.
The ASB Housing Confidence Survey said a net 43 per cent of respondents thought house prices would rise further, up from a net 20 per cent three months before.
This is despite another survey showing the median New Zealand house price was around six times median incomes, double the ratio of around five years ago.
High house prices make us feel wealthy, so we spend more and that pushes up inflation.
The likely scenario is that Bollard will push up interest rates, which will push up the dollar and that will tip more companies out of business and exacerbate the chronic current account deficit.
It is an absurd cycle which no one in power seems prepared to talk about, let alone offer a solution.
- NZPA
